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Bank of Canada: Poloz says Canada still getting over recession

Stephen Poloz says the 2008-09 global slowdown was unlike the “typical cycle in our economic textbooks” and the bank must “nurture” the Canadian economy.

Stephen Poloz, the new governor of the Bank of Canada, makes his first appearance before the Commons finance committee on Thursday to express his views on various economic issues. (Sean Kilpatrick / THE CANADIAN PRESS)

OTTAWA—Stephen Poloz, the new Bank of Canada governor, is stressing the need to “nurture” the Canadian economy in the wake of the unusually deep and destructive 2008-09 recession.

In his first comments before the Commons finance committee, the recently appointed Poloz said policy-makers must understand the difficulties of re-establishing business confidence and self-sustaining economic growth.

“The trauma that we’ve been through is not like a typical cycle in our economic textbooks at all,” he said. “In effect, the recession caused a significant structural change in the Canadian economy. The level of our country’s productive capacity — in other words, its potential — dropped.”

As a result, the current situation is “not a recovery in the usual sense,” Poloz said. “It will require sustained and focused efforts to rebuild (the Canadian and global economies).”

For Canada, returning to full growth will require an increase in demand for exports, which will increase business confidence and much-needed corporate investment in machinery and equipment.

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Poloz gave no indication that he would shift the central bank’s current stance on interest rates, which has seen its key overnight rate remain at a historically low 1 per cent since 2010.

Poloz, like predecessor Mark Carney, said interest rates must eventually begin to rise as the economy moves closer to full growth. That means currently high levels of household debt continue to pose a risk for the domestic economy.

Much of his testimony before the committee focused on the need to strengthen the economy, suggesting he will likely to continue with very low rates so as to spark increased business activity and economic growth.

Poloz, as former head of Ottawa’s export support arm, Export Development Canada, is used to working closely with Canadian companies to foster overseas sales and economic development.

“A speech that is all about ‘nurturing’ and the BoC’s role in building confidence throughout this process suggest a policy leaning toward at least a less hawkish BoC than under the last months of Carney’s tenure,” said Scotiabank economists Derek Holt and Dov Zigler later in a note to clients.

If so, that might lead the bank to ease back on Carney’s repeated warnings previously that the next move in interest rates would be up, not down, analysts say. But it would be a marginal shift in the central bank’s stance, since the economy is not expected to be strong enough to warrant higher interest rates until late next year or early 2015.

Poloz appeared right at home in his first session with members of Parliament as he covered a wide range of topics in two hours of testimony.

He said rebuilding after the recession has been daunting because many businesses actually folded or significantly downsized. And, with the global outlook still weak, it’s “very difficult” to assure corporations that it’s a good time to invest to expand production.

Asked about Carney’s controversial comment that businesses are sitting on too much “dead money,” which should be pumped back into the economy, Poloz characterized the hundreds of billions of dollars being held by corporations as a positive situation. “Healthy balance sheets” are a good thing that should make it easier for the economy to grow faster, he said.

Poloz rejected the notion that western Canada’s vast petroleum supplies are creating so-called Dutch disease — a situation in which resource riches lead to a higher-valued loonie, which hurts manufacturing in central Canada. He said Canada’s energy resources are “an unambiguously good thing” for the economy.

On trade, he said Canada’s economy won’t reach its potential unless Canadian companies expand their sales in the world’s fast-growing emerging economies. Free-trade deals of the kind being pursued by Prime Minister Stephen Harper’s government are “a fantastic way to pave that road,” he told MPs.

The main task of the Bank of Canada, he said, is to bolster Canadians’ confidence in the financial system and — by keeping inflation low — in the value of our currency.

“We must always remember that beneath our economic and financial statistics and analysis are real people, making real decisions that can lead to bad outcomes as well as good ones,” he said. “Those decisions are hard to make any time, but when uncertainty is high and confidence has not been fully restored, they can be even more difficult. A lack of confidence can mean that such decisions are postponed — and that opportunities are lost.”

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